The draft Indian Financial Code (IFC) prepared by the Finance Ministry indicate that government is going to have the decisive power over monetary policy.
As per the newly released draft, government will appoint four of the seven members of the Monetary Policy Committee. Most importantly, the RBI will not have his veto power at the committee.
There will be three members including from the RBI including the Governor. The RBI Governor will have the casting vote in the panel.
If implemented, the present recommendation is an extreme form of intervention in the affairs of the RBI.
Similarly, the control over monetary policy decisions by the government will make the newly introduced inflation targeting regime a meaningless one.
At present, the RBI Governor enjoys a veto power over in the Technical Advisory Committee which takes decisions on monetary policy especially the repo rate.
The IFC is going to be a turning point in the cold war between the RBI and the Finance Ministry. Historically, the RBI has pursued independent decisions on monetary policy front disregarding the continued requests on repo rate by the Ministry. The famous twelve time repo increase by the RBI governor and the famous walk alone statement by former Finance Minister P Chidambaram have revealed the depth of the strife between the two.
Recent monetary policy framework agreement was a point of conciliation.
Monetary Policy Committees is the body that should take decisions on critical decisions including the repo rate. There were contrasting views on the constitution of the MPC among the government and the RBI. The present constitution of the MPC was recommended by the Financial Sector Legislative Reforms Commission.
On the other hand, the RBI appointed Urjit Patel Committee has suggested RBI domination over monetary policy decisions.